How to Price Yourself as a Sole Proprietor

You've finally made it! After many months or, perhaps, years of planning and saving, you're now the sole proprietor of your very own business — woohoo! But now the real work begins, and one big question lies ahead: How much should you be charging?

Start with addressing how you should charge, then move on to determining an appropriate rate.

Charging by the hour vs. the project

Most self-employed service providers charge in one of the following ways:

• By the hour: You establish an hourly rate, keep track of your time, and bill clients for hours spent on their behalf. This is the standard pricing approach for service businesses handling small-project jobs.

• By the project: You and your client agree in advance on a fixed price for a defined amount of work. This is the standard pricing approach for service businesses handling large-project jobs.

• A combined approach: A building contractor, for example, may bid on a set of plans and establish a fee for the project. But he may also stipulate that additional client-requested work over and above that covered by the estimate is to be paid at an established hourly rate.

Other businesses follow other billing approaches. For example, authors often receive a royalty, or a percentage of the cover price, for each book sold. Freelance writers may charge by the page or word. A photographer might sell rights to photos based on the way the purchaser will use them. And some professionals are paid retainers, or upfront payments, in return for their availability to work on an as-needed basis.

Whatever payment arrangement you settle on, you still have to figure out exactly how much to charge.

Establishing an hourly rate

If you provide a service of some sort, begin by establishing an hourly rate. Even if you end up charging by the project or product, when you know your hourly rate, you can estimate the number of hours a job will take and multiply that number by your hourly rate to arrive at your project or product cost.

One way to establish an hourly rate is to find out what other people doing similar work charge. In some cases, you can discover this information simply by talking to other independent contractors or by looking at their websites or marketing materials. You can also check with professional organizations to get an idea of what people charge in different parts of the country. Rates do vary.

For example, freelance editors may be able to charge $35 an hour in St. Louis or Cedar Rapids and $50 or more in pricey places like New York or California. To be competitive, set your rates within a similar price range.

If you’re just starting out, you may want to begin at the lower end of the scale. If you have a long list of credentials and have earned rave reviews from clients, you can shoot for the upper end.

Another way to arrive at your pricing is to consider the following:

• How much customers will be willing to pay for your product or service

• How many hours a year you think you can spend on billable activities

• How many hours a year you need to devote to running your business

• How much it costs you to run your business

• Whether your projected revenue minus expenses equals an adequate profit

Say that you’re a consultant who wants to personally make $80,000 a year. Further, assume that your overhead costs total $22,000 a year, plus you want to earn at least $8,000 profit annually to fund future growth. That means your consulting business needs to bring in at least $110,000 each year.

Next, say that out of each 40-hour workweek, you’ll spend 12 hours running your business (doing the banking, networking, making new business calls, working with accountants, and on and on). That leaves 28 hours a week, 50 weeks a year (assuming that you give yourself two weeks off for a well-earned annual getaway) for billable activities — or a total of 1,400 billable hours a year.

With all of that information in hand, you can divide $110,000 by 1,400 hours to arrive at an hourly billing rate of $78.50.

If that’s more than you think clients will be willing to pay, you have a few choices: You can reduce your overhead costs, you can reduce your earnings and profit expectations, or you can spend more hours on billable activities, which probably means working longer weeks.

Determine your tasks, time, and expenses

To get a good idea of how you spend your working days, use this form. This information will be useful as you work to set your hourly rate.

Even if you’re self-employed, plan to make and set aside a profit above and beyond what you pay yourself. Doing so allows you to expand and develop your business when times are good. It also provides an important safety net, should your business experience an unforeseen setback.

Take time to figure the hourly rate you need to charge to cover your salary, overhead, and profit projections. You may want to use this form to make sure that your rate covers all your business expenses. Check all categories that apply to your business and enter the rough amounts you expect to spend.

In your business plan, include information on how and what you intend to charge for your service or product. Show the calculations behind your pricing decisions.